It is Time to Redefine Grid Parity and LCOE to Include Storage Costs

The Levelized Cost of Energy (LOCE) measures the cost of producing a unit of energy, such that all costs — from capital costs to running and maintenance costs — through the lifetime of the energy project, are included. Measuring LCOE of various fuels show that over the past several decades, the prices of renewables have been falling and becoming increasingly competitive with fossil fuels. The graph below by Lazard shows the LCOE of various fuels. As can be seen, Solar PV and wind are in or around the range of coal and gas.

When a renewable resource becomes cost competitive (as measured by LCOE) with the cheapest forms of conventional energy (say coal), it is said to have reached ‘Grid Parity’ (with coal). The implication is that since this renewable source is as cheap as coal, the economic motivation to pursue coal-based electricity no longer exists.

As the costs of renewables have been falling (as seen in the case of solar in the graph above), analysts have been going gung-ho about the prospects cheap renewables. (This report by Citi Research echoes the findings of the Lazard report linked above).

While the reasons to be optimistic about renewables are strong, there are qualifications to be made. After all, “the sun doesn’t shine at night”. Renewable energy is intermittent in nature, varying with the presence of the sun, wind or tides. Therefore, to replace fossil fuel sources, it will have to become cost competitive after including the cost of energy storage (which will smoothen energy supply to meet demand at any given hour). Currently, storage costs are high, as seen in the figure below.

After years of institutional help, technological advancements and economies of scale, Grid Parity of renewables is increasingly being achieved. The LCOE has provided a clear indicator of the relative costs, the way GDP growth provides an indicator of an economy’s health. But now that Grid Parity is being achieved, it is time to shift the goal post. It is time to look at the costs of renewable energy including a mix of appropriate storage options. I call this the ‘Grid Party Plus’ approach.

While the LCOE of energy storage is also calculated as seen in the graph above, it is not measured in conjunction with renewable sources, which it is supposed to complement. Unfortunately, the costs of energy storage have not fallen at the high rates seen in the case of solar and wind. That may, however, change. A yet to be publicly released report by Deutsche Bank curiously titled ‘Crossing the Chasm’ predicts that energy storage could become viable for large scale adoption in as few as five years. The Energy Storage Technology Roadmap by the International Energy Agency (IEA) provides a useful graph (below) showing how much energy storage technologies have developed so far.

The task now ought to be the attainment of ‘Grid Parity Plus’ around the world. While governments and industries are already working towards improving energy storage, adopting an ‘LCOE Plus’ approach (that includes energy storage costs) will provide greater clarity than merely LCOE does. It will provide the necessary signals to governments and institutions to intervene in the development of the technology and the energy market.

The author is available on Twitter @siddharth3